Taking Stock / Obama the Capitalist

Is the financial crisis really just a case of the free markets spinning out of control?

DAVOS - Forget 100 days' grace. Barack Obama hasn't been on the job two weeks and the list of malcontents is already growing by the day.

They thought he'd get the troops out of Iraq overnight and learned it would take time. Lots of time. They thought he wouldn't let Israel get away with the war on Gaza, but he actually half-supported it. They were sure that the torture camp of Guantanamo Bay would be closed the day Barack walked into the White House, but he gave it a year.

Naturally, Obama doesn't have to worry about these grousers. He still has an astonishingly high support rating of 79% among Americans and an unparalleled capacity to attract people of all kinds and sorts, despite the bruised, battered people's penchant to swallow and spit out politicians without second thought.

Probably Obama, with his charisma and rhetorical skills, will be able to win over hundreds of millions of Americans and people the world over for a long time to come.

But there's an issue on which he'll have to provide measurable, quantitative proof, and it's the toughest issue of them all: the economy. And here there's already a pool of malcontents ready to roll, a pool that will grow in the months to come: the disgruntled who thought his election marked the end of capitalism. They were sure they'd embarked on a new road that didn't pass through the free market.

Obama didn't dawdle. Right in his inaugural address, he set out the new boundaries of the economic debate. "Nor is the question before us whether the market is a force for good or ill," the president said.

The power of the free market to generate wealth and expand freedom is unmatched, he went on: "But this crisis has reminded us that without a watchful eye, the market can spin out of control - and a nation cannot prosper long when it favors only the prosperous."

Spin out of control? Is that it? Even advocates of the free market phrase things more strongly. What happened on Wall Street over the last five years wasn't a "spin out of control," it was something far more fundamental that may require deep thought, not merely a "watchful eye."

But at this stage Obama, it seems, doesn't want or can't discuss the tougher questions. The root of the problem is regulation, he suggests, and the solution lies in sharpening the watchful eye. He doesn't aim to kill capitalism, but to rescue it.

Most economists today fall into one of two camps. Some, like Obama, believe the free market failed because of flacid regulation. The others believe the exact opposite - that the free market failed because brutal governmental intervention distorted its mechanisms.

How did the government intervene? By pushing mortgages through government agencies, by lowering interest rates, and by rescuing bad financial institutions.

Obama belongs in the first camp. Like his predecessor, he means to inject hundreds of billions of dollars into the markets, maybe more; to rescue not only the banks but entire industries. His message is tighter regulation over the business sector.

The first step is a symbolic one: to shackle the lobbyists plying Washington. The second step is to appoint vigorous regulators who heed the public rather than the fat-cats of Wall Street.

To sum up, Obama belongs to the camp of economists who believe there's no better way to run economies than the free market, but that the greatest enemy of capitalism is capitalism itself, the great economic forces that constantly strive to twist the system in their favor, that strive to dampen competition, to build cartels and to milk the public of its money.

Obama can't settle for slogans: He has hard decisions to make, the hardest and most complicated in the history of economics. Is injecting money into the banks the way to save the people, or the banks?

Is nationalizing banks a short-term measure or a long-term one? Should the rescue of the car industry go through the companies' giant unions, or involve mass layoffs? Is Wall Street the enemy of the economy or its tool?

The issues are larger and thornier than ever. In private, behind closed doors, the most ardent advocates of the open markets look at the results of their work and tremble.

For the first time in many, many years, the great beneficiaries of the free markets are bereft of solutions and look to Obama, the leader of the free world, for answers. Yet in a few months, we may all discover that like them, he doesn't have any.

Here are some comments from the World Economic Forum at Davos:

- This is the worst recession since the 1970s.

- I suspect that in many ways, we're going to remember these last few years more than the period of the irrational exuberance.

- Not many people would dare to predict in which direction the world is going.

- This is the worst economic contraction since the Great Depression. The first quarter is going to be tough. I don't see a rebound before autumn.

The thing is, these remarks weren't made this week or last. They were said seven years ago, at the World Economic Forum in New York, four months after September 11, when the president of the forum decided to hold the conference in Manhattan for once, as a show of solidarity.

One could ostensibly derive some comfort from the fact that these comments were so grim, because within a year the global economy was roaring ahead to its best five years ever.

But this time, the probability of rapid recovery seems very remote. It is clear to all that one of the reasons for the sheer magnitude of the bubble that grew in those five years was the ardor of the American government to pump up the economy as quickly as possible after the collapse of the dot-com world and the Twin Towers.

This time around, everybody is standing gap-jawed before the collapse of the banks and financial institutions. Nobody's betting on recovery. It's clear to almost everybody that the game they had played for the last 20 years has changed.

Last year Merrill Lynch leader John Thain was strutting Davos like a peacock. He was the new guy, squeaky clean, who'd come to clean up Merrill Lynch and explain where the bankers got it wrong.

Until two weeks ago, Thain thought he'd be at the pinnacle of the who's who at Davos this year too - he was the one who had the good sense to sell his bank to the Bank of America at the last second.

But Thain didn't come. His 30-year career on Wall Street came crashing down in 15 minutes, when he was forced to resign two weeks ago. All that remains of his 30-year career was his decision to redo his personal office at Merrill Lynch at a cost of $1.2 million, including a perky little cabinet at a piffling cost of $35,000.

The CEOs read Thain's story with a shiver and wondered if they were next in line, whether their careers will also go out like candles in a storm. They understand that the bastards changed the rules and would do anything to make people think they had digested the new rules. But most can't grasp the new reality, even if they badly want to. Habits acquired over 20 years during the golden years on Wall Street, the years in which they were the Masters of the Universe, are hard to break.